At the end of the 80s we had a housing market crash [check], at the end of the 80s we had a stock market crash [check], during the 80s we had high unemployment [check], and during the 80s we had high inflation,… ‘well there’s the problem’.
Because of the inflation, things weren’t so good coming out
of the 80s and going on into the early 90s, and it actually took a bout of
relatively high interest rates to get things ultimately back on track.
The big difference, the only difference, which makes this
time different, is that what initially caused the recession. In the 80s we had
an oil shock which constrained a key input in just about everything that
America does. OPEC cut oil supplies and prices shot up, the amount of stuff
produced fell and prices went up, all that led to inflation.
At the same time, as the amount of stuff produced fell, the
people that made the stuff lost their jobs and unemployment went up. That was
the trifecta of economic woes that resulted in a period of Stagflation.
This time, there were no shocks that affected supply of
production inputs. And production fell, this time around because demand from
households for consumption fell. House values fell, borrowing against houses
fell, and all the business that revolves around household spending falls with
it. That gives us high unemployment and low production.
There really is no inflation to speak of, which leaves room
for a relatively painless transition for our current economic malaise to some
level of sustainable, albeit moderate growth.
